December 18, 2014
Yellen’s Patience Echoes Greenspan 2004 Run-Up to Rate Liftoff
Yellen told a press conference after the FOMC meeting yesterday that “the statement that the committee can be patient should be interpreted as meaning that it is unlikely to begin the normalization process for at least the next couple of meetings.” She then said “a couple means two.” The next two meetings are in January and March.
It goes without saying that "at least" can be safely ignored while "couple means two" and only two.
For example, today's the 22nd. Try telling your kids that it is unlikely that they can open Santa's gifts over the next couple of days. After grilling you on the definition of "couple", they'll expect Santa's gifts on the morning of the 24th. Count on it. It's okay though. Santa can show up early at your house. He's just an illusionary stranger who brings toys for your children anyway. I'm sure any stranger will do. What's the worst that could happen? Go with the stranger in the van! You know, since vans can hold more toys.
Shame on me.
But enough about that mainstream theory. Here's my alternate "crazy" theory.
The following chart shows the price of crude oil.
Click to enlarge.
Are you curious what was in that crazy speech by Charles Evans? Have no fear! I am to please! And just to be clear, the commentary will be coming from me and not from Janet Yellen. I'm not a mind reader.
September 24, 2014
Federal Reserve Bank of Chicago: Patience Is a Virtue When Normalizing Monetary Policy
But today, with the collapse of labor demand during the Great Recession and ongoing structural changes...
Oh, @#$%! He did not just say ongoing structural changes! Somebody tell me he didn't say that!
Accordingly, before the Fed raises rates we should have a great deal of confidence that we won’t be forced to backtrack on our moves and face another painful period at the ZLB.
Oh, @#$%! He did not just say that another painful period of ZIRP could be possible!
We should be exceptionally patient in adjusting the stance of U.S. monetary policy...
Oh, @#$%! Exceptionally patient? It's been more than 5 years already! @#$%!
As everyone in this room is aware, the labor force participation rate has fallen throughout the recession and recovery and is now at a 35-year low.
OMG! He mentioned the elephant in the room! What if other people notice it? Then what?
Virtually all the gap during this cycle has been due to withdrawal from the labor market of workers without a college degree. By contrast, a participation gap never materialized for college graduates, even during the depths of the recession. There is no simple explanation for this striking contrast.
OMG! What if those with college degrees are taking jobs that don't require college degrees! Oh, wait. There is no simple explanation. Never mind. This one was a false alarm. Whew!
Looking ahead, we think that declines in the labor force participation rate and population growth will bring the trend in payroll employment growth down to fewer than 50,000 jobs per month by 2016. This new benchmark probably will only become apparent in the monthly data once the economy closes the current 3.8 million employment gap. But barring sizable changes in immigration policy, policymakers and the public will need to get accustomed to a slower base of employment growth by the latter part of the decade.
Oh, @#$%! Somebody put a gag order on this crazy man! Have either Mark Zandi or Jeremy Siegel been informed that the future might not be like the ancient past? How about the pension funds counting on growth to mimic what it once did? Oh, the humanity!
Alternatively, more stringent hiring standards might signal a persistent structural problem.
Oh, @#$%! A persistent structural problem? What is it with him and structural problems? @#$%!
It’s hard for me to imagine a full labor market recovery without genuine improvement in compensation growth. But am I wrong? Has the wage Phillips curve completely broken down?
@#$%! @#$%ing @#$% @#$%!!
By many economic accounts, it took the big fiscal expansion associated with World War II to exit the Great Depression.
OMG! World War II! WTF! Albert Einstein once said that World War IV will be fought with sticks and stones! World War III is therefore not an option!!
We can also learn from the Japanese experience over the past 20 years.
Oh, @#$%! He said Japan! WTF was he thinking!
Many forecasters — myself included — assume that stable 2 percent inflation expectations will be an important factor helping to pull actual inflation up.
Oh, @#$%! Inflation expectations have been falling like a rock since his speech, along with the price of oil! So much for important factors! @#$%!
To summarize, I am very uncomfortable with calls to raise our policy rate sooner than later.
OMG! It's like he's laying on a bed of nails! He can't possibly be more comfortable now! The falling price of oil is like a two ton stone on his chest!
Once again, I want to stress that the commentary is by me, and in no way would represent what Janet Yellen is/was thinking about the speech. I've never heard her swear. I can't imagine she'd be thinking what I was thinking. And in no way would I imply that she would use so much dramatic punctuation, at least not in public.
St. Louis Fed: Custom Chart